California is implementing massive wage cuts for hundreds of thousands of its workers......how many Californians can sustain a 20% wage cut and still meet their minimum monthly obligations?

The economic distress is quickly turning into personal stress and natural human reaction to protracted stress is well documented. And this phenomenon is not limited to America, economic distress is rapidly growing around the world and the reaction will be very predictable.

This from France:

Workers at a failed French car parts supplier are threatening to blow up their factory unless the company’s two biggest clients – Renault and PSA Peugeot Citroen – stump up extra compensation.

Employees of the engine parts maker New Fabris have rigged up a series of gas canisters inside a factory workshop which they say will be detonated on July 31 if the two carmakers fail to pay €30,000 to each of the 366 workers facing unemployment.

The problem facing the world's economy is that over the past ten years, the banking system infected the private and public sectors with too much debt. Now the debt is simply unsustainable. As the economies inevitably contract, debt service will consume a greater and greater percentage of GDP.

Eventually, if the debt is not removed, the GDP will contract to the point where debt service payments equal or exceed GDP and the only money available is directed to pay the bankers and practically nothing for goods and services. This is the concept the Institute of Alstrynomics defines as Concentric Contraction and the slowdown is now being felt EVERYWHERE.

Think of the California family where 80% or more of its income was going to pay taxes, interest, and insurance. There are thouands upon thousands of families in this situation. After a 20% wage cut, the family will have zero dollars for discretionary spending including food and clothing.

Concentric Contraction also applies to government. As government tax receipts dwindle from lower consumer spending, outstanding debt service begins to consume a greater and greater percentage of tax revenues leaving little for services. Eventually, debt service consumes so much that government must start taxing citizens assets and savings simply to pay the politicians wages and bankers at the same time.

It is at this point that populations generally start rebelling. We are nearing that point......9.09 is not far in time.

You would be amazed at the number of American's who are paying between 70% and 110% of their income on taxes, interest and insurance.

There are now 25 million Americans either unemployed or working part time that fit in the above catagory. Millions more who have seen their ARM mortgages ratchet upwards. Even more who are on pay option who are coming up on their limits. Don't forget the tens of millions who have seen their health insurance costs and property taxes more than double over the past eight years.

Soon, many of the 25 million government workers across the nation are either going to lose their jobs or be forced to make massive wage concessions. CA is leading the charge right now with hundreds of thousands already cut 20%.

25 million here, 25 million there, add in the spouses and kids and the numbers get pretty serious pretty quickly.

CA is leading the charge right now with hundreds of thousands already cut 20%.

Already cut? Not quite. Some of the furlough days have been implemented, the across-the-board wage cut is a budget proposal which has yet to be enacted (I'm willing to stand corrected if the Governor did this by executive order, but I've seen no news of that).

A lot of Californians have little sympathy for the government worker, however.

And this does not count benefits -- this is just base pay. California state workers are predominantly covered by defined benefit retirement plans (while the vast majority of those in the private sector are on defined contribution plans, if one at all). Additionally, California state workers' have their health benefits entirely employer funded, whereas those of us in the private sector foot a good portion of the bill.

California's budget mess has been a long time coming and was inevitable. It has also been completely forseeable for more than a decade to anyone who bothered to take even a cursory glance.

There is little more dangerous than a man with nothing to lose. If/when hungry people start taking to the streets looking for victims, some will hide, some may call the police, and some may wonder why it is that gun laws didn't protect them. Others will exercise their right to self defense.

Gloom and doom? Maybe, but I'm just as prepared for that as I am for a slow, steady rise in the DOW.

Most of the other states are falling right behind California as tax receipts continue to evaporate. Most of the workers created a budget never expecting a wage decline. I am not here to make a value judgment, simply analyze the facts.

It is quite obvious to the casual observer, unless the massive debt burden is relieved from our economy, as the GDP contracts, we will soon reach a point where the cost to SERVICE the debt will exceed GDP and there practically nothing to purchase goods and services....welcome to the Zombulator my friend.

we will soon reach a point where the cost to SERVICE the debt will exceed GDP

I don't think that's theoretically possible. The national debt may approach GDP if things continue apace, but the debt service is only a small portion of that. If you are talking about private/commercial debt, long before debt service approaches GDP we'll see massive defaults and bankruptcies, which would lead to discharging much of that debt (and bring the debt service to GDP ratio down again).

Might there be much more economic pain ahead? There very well might -- I'm not arguing that point. Debt service taking a larger portion of GDP? Certainly possible. But debt service exceeding GDP? In my mind, it just doesn't seem feasible.

I agree with bridgeboy..I live on Central California Coast and my property taxes went down. Sure, the Condo I bought a year and a half ago has lost value, but it will go back up. We had record crowds in our city during 4th of July weekend even with the Fireworks having been cancelled. Our traffic for the rest of this summer has only been down about 4%, but revenue is way up. Sorry Alstry...I haven't seen your Doom and Gloom here yet. If it happens I'll survive by eating Sea Gulls and Sea Lions....we have plenty of those.

Think of what happens to a one income family whose main provider loses his job. It happens every day, thousands of times a week and hundreds of thousands of times a month.

While a hardship for the families in question, this does not prove that debt service exceeding GDP is possible. Should this family's debt service payments outpace their ability to pay they will default, and if things get really bad, declare bankruptcy. Bankruptcy leads to the discharging of some or all of the debt -- bringing the debt service to GDP ratio down again.

What happens to a leveraged business that sees its revenues evaporate.....especially common in Commercial Real Estate.

Debt service levels will never exceed GDP. Again, massive defaults would happen first, followed by bankruptcies, which woud lead to the discharging of much of the debt. In short, bankruptcies will prevent your prediction from coming to pass.

Debt service levels will never exceed GDP. Again, massive defaults would happen first, followed by bankruptcies, which woud lead to the discharging of much of the debt. In short, bankruptcies will prevent your prediction from coming to pass.

Though you explain it very clearly, I still bet that Alstry won't give up his point.

Now you are catching on.....massive defaults defaults beget massive defaults and becomes a adverse feedback loop.

The customer can't afford to shop at the store, the anchor in a shopping center can't pay rent, the landlord can't pay the mortage or property tax, the revenues to the city evaporates and the bank drops below capital requirments and gets shut down as hundreds lose jobs through the process triggering more massive defaults.

Whether debt service technically exceeds GDP is really not too relevant, if enough massive defaults occur, the economy will shrink to such a small size that the remaining size of GDP won't beable to sustain any kind of acceptable standard of living.

You are beginning to appreciate the entire concept of Zombulation and Concentric Contraction.

And to all of you GS and Morgan Stanly will make oddles of money do the work to re re finance the debt. Who took the depression era laws of the market on comodies? Congress. Who got congress to take the laws off the books? oh yea GS and Morgan Stanly. And round and round she goes. So where do you think our rent a dollar from the FED aka IMF goes from here.

I think your point was whether GDP could fall below debt service payments....my response was it theoretically could and my response was correct.

But from a practical perspective, and to make bridgebaby smile a bit, I conceded it really didn't matter.

If your earnings fall substantially below your minimum sustainable expenses.....you are Zombulated and not much else matters at that point.

If you need 1000 calories a day to live, and you are taking in only 100 or 200.....practically, you die of malnutrition in a compressed period of time whether you take in the former or latter, it is just a matter of when;)

I agree that interest payments will never exceed GDP. Interest payments on the national debt are the fourth largest line item on the national budget, and are quickly approaching $1 trillion. This is bad, but for this to play out in the near term, we would need to see a massive decline in GDP. In such a dire situation, I would assume that we would lose the ability to borrow anything at a reasonable rate, and we would inflate our debt away and destroy the USD completely.

In Barcelona for the MOTO GP recently (yes I get paid to do these things) my wife & I were shocked to see healthy young men digging in trash cans for food as we walked to the metro after the concert at Musica. Seeing the beautiful young girls selling themselves on the corner is nothing new (wife and I are in Vegas way too oten). But the digging for food in garbage was a shock. These young men were good looking and highly organized in how they were gathering the food from all the trash containers in the street we were walking thru. My client in Spain told me they are down 57% this year. Ouch. As I met the top brass in the board room Monday after the GP I shared my concerns about their local economy. They are very concerned about both the depth of the fall and the reality that this year is toast.